Nutrisystem 2012 Annual Report Download

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Table of contents

  • Page 1

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  • Page 3
    .... To that end, we have recently launched two 5-day weight loss kits, including one targeted to people with type 2 diabetes. We are encouraged by the initial results which indicate that the trial kits are introducing the Nutrisystem brand and program to a new group of consumers. While these are still...

  • Page 4

  • Page 5
    ...) 23-3012204 (I.R.S. Employer Identification No.) Fort Washington Executive Center 600 Office Center Drive Fort Washington, Pennsylvania (Address of principal executive offices) 19034 (Zip Code) Registrant's telephone number, including area code: (215) 706-5300 Securities registered pursuant...

  • Page 6
    ... Officers and Corporate Governance ...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accounting Fees and Services ...PART IV Item...

  • Page 7
    ... to the market; the effectiveness of our marketing and advertising programs; loss, or disruption in the business of, any of our food suppliers; loss, or disruption in the business, of our fulfillment provider; disruptions in the shipping of our food products; health or advertising related claims by...

  • Page 8
    ...telephone. Our customers can order 24 hours a day, seven days a week on our website, www.nutrisystem.com, and the food is shipped directly to the customer's door. Simplicity. We provide a comprehensive weight management program, consisting of a pre-packaged food program and counseling. Our customers...

  • Page 9
    ... with a month of food, including daily breakfast, lunch, dinner and dessert, which removes the confusion of reading nutrition labels, measuring portions or counting calories, carbohydrates or points. We believe our weight management program offers our customers significant value and is priced below...

  • Page 10
    ... in our market. Our Products and Services For 40 years, the Nutrisystem name has been recognized as a leader in the weight loss industry. We provide a comprehensive weight management program, consisting primarily of a pre-packaged food program, online tools and counseling. Trained counselors are...

  • Page 11
    ... customers order through our Auto-Delivery feature. By offering a variety of ready-to-go and frozen foods, we help our customers sustain their weight loss efforts. On our website, customers can order food 24 hours a day, seven days a week. The transition and maintenance plans included in the SUCCESS...

  • Page 12
    .... These lower cost programs help extend the supportive relationship and allow time to reinforce the dietary changes that produced the initial weight loss. These plans include recipes and portion-control tools in addition to a reduced number of Nutrisystem® entrees delivered each month. The features...

  • Page 13
    ... tools. Sales and Counseling A majority of our direct business sales occur on our website. The remaining sales are by telephone, and our call center processes all of them. Our weight loss program is also sold through QVC, a television home shopping network and, in 2012, we introduced a new in-store...

  • Page 14
    ... team uses a number of sources - customer feedback, market trends, nutrition science, and breakthroughs in food technology - to create new ideas for our program. New foods are created to enhance the variety of our current offerings or to support the efforts of creating a new program. Typically...

  • Page 15
    Our Customers We offer weight loss programs designed for women, men, seniors as well as people with type 2 diabetes who want to lose weight. Based on our customer data, our typical customer is female, approximately 50 years of age and weighs approximately 187 pounds. We believe that, on average, our...

  • Page 16
    ... Form 10K, quarterly reports on Form10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the "1934 Act Reports"), are available free of charge through our investor relations page at www.nutrisystem.com...

  • Page 17
    ... to 2012. Following the sale of QSP, Inc. in 2012, Ms. Krausz became head of new business development for Animated Storyboards, a global independent provider of television test spots to the advertising industry. Ms. Krausz started her career at Reader's Digest Association in 1992, and held a number...

  • Page 18
    ... defer purchases of our program which could adversely affect our revenue, gross margins, and/or our overall financial condition and operating results. We rely on third parties to provide us with adequate food supply, freight and fulfillment, Internet, networking and call center services, the loss of...

  • Page 19
    ... result in lawsuits, damage to our reputation and divert management's attention from our business, which would adversely affect our business. We may be subject to health or advertising related claims from our customers. Our weight loss program does not include medical treatment or medical advice...

  • Page 20
    ...areas of program efficacy, price, taste, customer service and brand recognition. Our competitors include companies selling pharmaceutical products and weight loss programs, as well as a wide variety of diet foods and meal replacement bars and shakes, appetite suppressants and nutritional supplements...

  • Page 21
    ... our use of such information or data collected on our website or through our services and products, such as weight management information, financial data, email addresses and home addresses, could keep them from using our website or purchasing our services or products. We currently face certain...

  • Page 22
    ..., to promote our weight management program. Any of these spokespersons may become the subject of adverse news reports, negative publicity or otherwise be alienated from a segment of our customer base, whether weight loss related or not. If so, such events may reduce the effectiveness of his...

  • Page 23
    ... our operating results. Our program features pre-packaged food selections, which we believe offer convenience and value to our customers. Our continued success depends, to a large degree, upon the continued popularity of our program versus various other weight loss, weight management and fitness...

  • Page 24
    ..., whether or not accurate, could also damage customer confidence in our weight loss program and result in a decline in revenue. Adverse publicity could arise even if the unfavorable effects associated with weight loss products or services resulted from the user's failure to use such products...

  • Page 25
    ... manufacturing practices and quality standards for food products. Product liability claims could have a material adverse effect on our business as existing insurance coverage may not be adequate. Distributors of weight loss food products, vitamins, nutritional supplements and minerals, including our...

  • Page 26
    ... specifically claimed the action to be a failed "say-on-pay" shareholder derivative action stemming from the advisory, non-binding vote of the Company's stockholders at its May 12, 2011 annual meeting in which the Company's stockholders did not approve the Company's 2010 executive compensation. The...

  • Page 27
    ... "say-on-pay" advisory, non-binding vote of the Company's stockholders at its May 12, 2011 annual meeting in which the Company's stockholders did not approve the Company's 2010 executive compensation. Although the Company believed that the claims were without merit, on September 5, 2012 plaintiff...

  • Page 28
    ...low sale prices for the Company's common stock as reported on the NASDAQ Stock Market. High Low 2013 First Quarter (through February 28, 2013) ...2012 First Quarter ...2012 Second Quarter ...2012 Third Quarter ...2012 Fourth Quarter ...2011 First Quarter ...2011 Second Quarter ...2011 Third Quarter...

  • Page 29
    ...following table provides information relating to our purchases of our common stock during the quarter ended December 31, 2012: Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs...

  • Page 30
    STOCK PRICE PERFORMANCE GRAPH The following graph shows a comparison of cumulative total return since December 31, 2007, for our common stock, the Russell 2000 Index and the Dow Jones US Specialized Consumer Services Index (a published industry index), each of which assumes an initial value of $100 ...

  • Page 31
    ... Items 7 and 8, respectively, in this Annual Report. Selected Consolidated Financial Data (In thousands, except per share data) 2012(a) 2011 Year Ended December 31, 2010 2009 2008 Statement of Operations Data: Revenue ...$396,878 $401,336 Costs and expenses: Cost of revenue ...Marketing ...General...

  • Page 32
    ... by our subsidiary, Nutrisystem Fresh, Inc. ("NuKitchen"), as it was no longer aligned with the business direction of the Company. During the third quarter of 2010, this business was shut down as we were unsuccessful in locating a buyer. Accordingly, the operating results of this discontinued...

  • Page 33
    ... to date and teamed with new celebrities for new national ad campaigns. The SUCCESS program is designed to help take the weight off and keep it off through frequent, portion-controlled, balanced nutrition and low Glycemic Index eating. It offers our largest ever assortment of signature frozen meals...

  • Page 34
    ...'s Table dinner entrees and protein shakes with new customer starts, thus allowing a large number of customers to try these new products. Continued price promotions and the sale of our Nutrisystem® Advanced® inventory to a closeout retailer as we transitioned to the SUCCESS program also impacted...

  • Page 35
    ... compensation related to fulfillment, the costs of outside fulfillment, incoming and outgoing shipping costs, charge card fees and packing material. Cost of products sold includes products provided at no charge as part of promotions and the non-food materials provided with customer orders. Marketing...

  • Page 36
    ... cost items with customer starts. Continued price promotions and the sale of our Nutrisystem Advanced inventory to a closeout retailer as we transitioned to the SUCCESS program also negatively impacted gross margins. Marketing expense increased to $111.1 million in 2012 from $110.9 million in 2011...

  • Page 37
    ... vacate a facility. Additionally, we recorded an impairment charge ($2.1 million) related to advances paid to a frozen food supplier as the supplier was in default with its bank lender and was in the process of negotiating a work out plan and exploring other strategic alternatives. Depreciation and...

  • Page 38
    ...revenue decline occurred across all of our sales channels primarily due to lower average selling prices and fewer customer starts and on-program customers as a result of bargain-focused consumer behavior and discounted promotional offerings. In 2011, direct revenue accounted for 95% of total revenue...

  • Page 39
    ....3% as compared to $19.3 million of income tax expense in 2010 with an effective tax rate of 36.3%. The change in the effective tax rate was due to the impact of limitations on executive compensation deductions and food donations in comparison to pre-tax income, as well as reductions in tax reserves...

  • Page 40
    ... of shares repurchased depend on a variety of factors including price, corporate and regulatory requirements, alternative investment opportunities and other market conditions. The stock repurchase program has an expiration date of June 30, 2013 but may be limited or terminated at any time without...

  • Page 41
    ... cash equivalents at December 31, 2012 of $16.2 million were maintained in bank and money market accounts. Additionally, we invested $3.2 million in short term investments, which are classified as available-for-sale securities and are reported at fair value in the accompanying consolidated balance...

  • Page 42
    ...by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based upon that evaluation, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2012. The Company's independent registered public accounting firm, KPMG LLP...

  • Page 43
    ...of Nutrisystem, Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive (loss) income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated March 12, 2013...

  • Page 44
    ... the 2013 annual meeting of stockholders, to be filed within 120 days after the end of the fiscal year covered by this annual report on Form 10-K, and is incorporated herein by reference. The required information as to executive officers is set forth in Part I hereof. ITEM 11. EXECUTIVE COMPENSATION...

  • Page 45
    ... None, as all information required in these schedules is included in the Notes to the Consolidated Financial Statements. 3. Exhibits Reference is made to the Exhibit Index on page 67 of this Annual Report for a list of exhibits required by Item 601 of Regulation S-K to be filed as part of this...

  • Page 46
    NUTRISYSTEM, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ...Consolidated Balance Sheets at December 31, 2012 and 2011 ...Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010 ......

  • Page 47
    ... reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 12, 2013 expressed an unqualified opinion on the effectiveness of the Company...

  • Page 48
    ... (5,000,000 shares authorized, no shares issued and outstanding) ...Common stock, $.001 par value (100,000,000 shares authorized; shares issued - 28,631,464 at December 31, 2012 and 28,180,705 at December 31, 2011) ...Additional paid-in capital ...Treasury stock, at cost, 72,561shares at December 31...

  • Page 49
    ...) Year Ended December 31, 2012 2011 2010 REVENUE ...COSTS AND EXPENSES: Cost of revenue ...Marketing ...General and administrative ...Depreciation and amortization ...Total costs and expenses ...Operating (loss) income from continuing operations ...OTHER EXPENSE ...INTEREST (EXPENSE) INCOME, net...

  • Page 50
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (In thousands) Year Ended December 31, 2012 2011 2010 Net (loss) income ...OTHER COMPREHENSIVE (LOSS) INCOME: Foreign currency translation adjustment ...Short term investments: Unrealized gain (loss) on short ...

  • Page 51
    ... of tax ...BALANCE, December 31, 2011 ...Net loss ...Share-based compensation expense, net ...Exercise of stock options ...Equity compensation awards, net ...Cash dividends ...Purchases of common stock ...Other comprehensive income, net of tax ...BALANCE, December 31, 2012 ... 30,944,284 0 371,030...

  • Page 52
    NUTRISYSTEM, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year Ended December 31, 2012 2011 2010 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income ...Adjustments to reconcile net (loss) income to net cash provided by operating activities: Loss on discontinued ...

  • Page 53
    ...program, specifically designed to help people with type 2 diabetes who want to lose weight and manage their diabetes. The Nutrisystem® programs are based on 40 years of nutrition research and on the science of the low glycemic index. The Company's pre-packaged foods are sold directly to weight loss...

  • Page 54
    ... cards is recognized after the card is redeemed online at the Company's website by the customer and the product is shipped to the customer. Deferred revenue consists primarily of unredeemed prepaid program cards and unshipped frozen foods. When a customer orders the Nutrisystem® Select® program...

  • Page 55
    ... 30 days of purchase in order to receive a refund or credit. Frozen products are non-returnable and non-refundable unless the order is canceled within 14 days of delivery. Estimated returns are accrued at the time the sale is recognized and actual returns are tracked monthly. The Company reviews its...

  • Page 56
    ... related to unrecognized tax benefits as part of interest (expense) income, net. Segment Information The Company is managed and operated as one business. The entire business is managed by a single management team that reports to the chief executive officer. Revenue consists primarily of food sales...

  • Page 57
    ... basic loss per common share as the Company is in a net loss position and the impact of including common stock equivalents is anti-dilutive. In 2012, 2011 and 2010, common stock equivalents representing 1,637,400, 656,871 and 167,158 shares of common stock, respectively, were excluded from weighted...

  • Page 58
    ... amendment is effective for fiscal years beginning after December 15, 2011, and should be applied retrospectively. The Company has added separate consolidated statements of comprehensive (loss) income to the accompanying financial statements. In February 2013, the FASB issued ASU No. 2013-02 which...

  • Page 59
    ... at December 31, 2012 and December 31, 2011. The following table summarizes the Company's financial assets measured at fair value at December 31, 2012: Quoted Prices in Active Markets for Identical Assets (Level 1) Total Fair Value Money market account ...Corporate debt securities ...Time...

  • Page 60
    ... from 1.752.75% per year for LIBOR rate loans. The Company will also pay an unused line fee. The unused line fee is subject to adjustment based on the Company's consolidated fixed charge coverage ratio and ranges from 0.250.375% per year. During 2012, 2011 and 2010, the Company incurred $764, $417...

  • Page 61
    ... specifically claimed the action to be a failed "say-on-pay" shareholder derivative action stemming from the advisory, non-binding vote of the Company's stockholders at its May 12, 2011 annual meeting in which the Company's stockholders did not approve the Company's 2010 executive compensation. The...

  • Page 62
    ... Eastern District of Pennsylvania stemming from the same failed "say-on-pay" advisory, nonbinding vote of the Company's stockholders at its May 12, 2011 annual meeting in which the Company's stockholders did not approve the Company's 2010 executive compensation. Although the Company believed that 58

  • Page 63
    ... strategic alternatives. As of December 31, 2012 and December 31, 2011, advances to this frozen food supplier were $690 and $2,313, respectively. During 2012, the Company recorded an impairment charge of $2,100 related to this advance due to the work out plan. The impairment was recorded in general...

  • Page 64
    ... depend on a variety of factors including price, corporate and regulatory requirements, limitations under the credit facility, alternative investment opportunities and other market conditions. This stock repurchase program has an expiration date of June 30, 2013, but may be limited or terminated at...

  • Page 65
    ... tax rate to the Company's effective tax rate is as follows: Year Ended December 31, 2012 2011 2010 Statutory federal income tax rate ...State income taxes, net of federal benefit ...Executive compensation limitation ...Executive stock-based compensation ...Food donations ...Fixed assets ...Changes...

  • Page 66
    ... related to unrecognized tax benefits as part of interest (expense) income, net. During 2012 and 2011, the Company recognized interest income of $13 and $133, respectively, and $99 of interest expense in 2010 from interest and penalties. The Company's federal income tax returns for 2009 through 2012...

  • Page 67
    ... Directors resulting in compensation expense of $455 in each year. In addition, in 2012, 2011 and 2010, the Company issued a total of 21,626, 124,561, and 11,576 shares of common stock, respectively, to non-employees for services. Costs recognized for shares issued to non-employees for services were...

  • Page 68
    The Company has issued restricted stock to employees generally with vesting terms ranging from two to five years. The fair value is equal to the market price of the Company's common stock on the date of grant. Expense for restricted stock is amortized ratably over the vesting period. The following ...

  • Page 69
    .... As of December 31, 2012, there was $9,836 of total unrecognized compensation expense related to unvested share-based compensation arrangements, which is expected to be recognized over a weighted-average period of 1.4 years. 12. EMPLOYEE BENEFIT PLAN The Company maintains a qualified tax deferred...

  • Page 70
    ... The sum of the quarterly basic and diluted per share amounts may not equal amounts reported for the year. This is due to the effects of rounding and changes in weighted average shares outstanding for each period. In the fourth quarter of 2012, the Company recorded a charge of $2,476 to restructure...

  • Page 71
    ...to the designated exhibit of the Company's Report on Form 8-K filed on September 6, 2012. 2000 Equity Incentive Plan of the Company. 2000 Equity Incentive Plan for Outside Directors and Consultants of the Company. Agreement dated December 21, 2004 between Nutrisystem, Inc. and QVC, Inc. incorporated...

  • Page 72
    ..., Inc. dated April 5, 2012, incorporated by reference to the designated exhibit on the Company's Report on Form 8-K filed on April 5, 2012. Employment Agreement dated February 5, 2013 between Nutrisystem, Inc. and Keira Krausz, the Company's Executive Vice President and Chief Marketing Officer. Form...

  • Page 73
    ... exhibit of the Company's Registration Statement on Form 10 filed on December 17, 1999 (file number 0-28551). Incorporated by reference to the designated exhibit of the Company's Form PRE 14A filed on May 12, 2000 (file number 0-28551). Management contract or compensatory plan or arrangement. 69

  • Page 74
    ... undersigned, thereunto duly authorized. Nutrisystem, Inc. By: /S/ DAWN M. ZIER Dawn M. Zier, President and Chief Executive Officer Dated: March 12, 2013 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the...

  • Page 75
    ... report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. b. Date: March 12, 2013 /S/ DAWN M. ZIER Dawn M. Zier President and Chief Executive Officer

  • Page 76
    ...information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. b. Date: March 12, 2013 /S/ DAVID D. CLARK David D. Clark Executive Vice President and Chief Financial Officer

  • Page 77
    ... of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ DAWN M. ZIER President and Chief Executive Officer 2) Date: March 12, 2013

  • Page 78
    ...or 15(d) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /S/ DAVID D. CLARK Executive Vice President and Chief Financial Officer 2) Dated: March 12, 2013

  • Page 79
    ..., Inc. EXECUTIVE OFFICERS Dawn M. Zier President and Chief Executive Officer Keira Krausz Executive Vice President and Chief Marketing Officer GENERAL INFORMATION Corporate Headquarters Fort Washington Executive Center 600 Office Center Drive Fort Washington, PA 19034 (215) 706-5300 Annual Meeting...

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